Over the last year, many businesses have benefited from COVID-19 support from programs initiated by the federal government. As businesses prepare and file their tax returns for 2020, the question of how amounts received are taxed becomes important. This article addresses the tax reporting for several types of COVID-19 support that were provided. While this article will address the tax implications for corporations, the same general principles will apply to reporting COVID-19 support for other entities.
Canada Emergency Wage Subsidy (CEWS)
The Canadian Emergency Wage Subsidy (CEWS) program has been the largest federal support program for businesses during the pandemic, according to information released by the government in the November 30, 2020 Fall Economic Statement. To obtain support under this program, CEWS applicants must have suffered a decline in revenue from arm's length customers compared to the same period in the previous year or compared to the average revenue of January and February 2020.
The first application for the CEWS was available on April 27, 2020, for the four-week qualifying period that ran from March 15, 2020, to April 11, 2020. New qualifying periods occurred every four weeks from that first period in 2020, and continue in 2021 to June 2021, when the program is scheduled to end.
The benefit received under the CEWS program is taxable to the recipient. Due to a specific provision in the Income Tax Act (the Act), the CEWS benefit is considered received and therefore taxable on the last day of the qualifying period to which it relates. The last CEWS qualifying period of calendar 2020 ended on December 19, 2020. This means that all CEWS benefits that were claimed for the qualifying periods ending in 2020 are to be accrued as taxable income in 2020 for taxpayers whose tax year-end is December 31. This rule of taxable income recognition will apply even if a CEWS benefit for qualifying periods that ended in 2020 is not applied for until 2021.
The Act provides a deadline for application for CEWS. The first deadline was January 31, 2021, for the qualifying periods that ran from March 15 to August 1, 2020. The deadline for application for the following qualifying periods is 180 days after the end of the qualifying period.
This income recognition rule may create differences between accounting and taxable income where a qualifying period straddles a tax year-end. This rule may also cause cash-flow issues if there were delays in filing CEWS claims if tax is payable on the benefit before it is received.
Certain key concepts for CEWS are outlined in our earlier Tax Alerts: COVID-19–Wage Subsidy Programs and Canada Emergency Wage Subsidy details.
Canada Emergency Rent Subsidy (CERS)
The Canada Emergency Rent Subsidy (CERS) program was introduced in October 2020 as a replacement to the Canada Emergency Commercial Rent Assistance (CECRA) Loan program (see below). In contrast to the CECRA, which required commercial property owners to apply instead of their small business tenants, the CERS provides support directly to qualifying tenants and property owners and is not restricted to businesses of a certain size.
This program is available to property owners as well as tenants, so the name of the program can be misleading. Under this program, tenants and property owners can claim a subsidy if they have qualifying costs and a qualifying revenue reduction. For tenants, these costs include arm's length rent payments, and for businesses and other qualifying entities who own their property, the costs include certain mortgage interest, property taxes, and property insurance payments.
The first application for the CERS was for the four-week qualifying period that ran from September 27, 2020, to October 24, 2020. New qualifying periods occurred every four weeks from that first period in 2020, and continue in 2021 to June 2021, when the program is scheduled to end. The CERS program has the same four-week schedule and uses the same methodology as CEWS to determine qualifying revenue drops.
As with CEWS, the benefit received under the CERS program is taxable to the participant, and the benefit is considered received and therefore taxable on the last day of the qualifying period to which it relates. The last CERS qualifying period of calendar 2020 ended on December 19, 2020. This means all CERS benefits that were claimed for the three qualifying periods ending in 2020 are to be accrued as taxable income in 2020 for calendar tax-year taxpayers. This rule of income recognition will apply even if a CERS benefit was not applied for until after the end of the taxation year.
Although CERS for the first qualifying period ending October 24, 2020, could be applied for as of November 23, 2020, the deadline for application for this first period is 180 days after October 24, 2020, or April 22, 2021. Many businesses may not have applied for the CERS until 2021, but the CERS benefit applied for the periods ending in October, November, and December 2020 must be accrued in the tax return for businesses with a December 31, 2020, tax year-end. As with CEWS, this may create an accounting timing difference and may create cash flow issues if tax is payable on the benefit before it is received.
Details for the CERS program can be found in our Tax Alert: Government introduces the new Canada emergency rent subsidy program.
Temporary Wage Subsidy (TWS)
When the Temporary Wage Subsidy (TWS) was introduced, it was intended that it would be applied for by reducing payroll source withholdings in the benefit period between March 18, 2020, and June 19, 2020. As such, the benefit of the TWS, up to a maximum of $25,000, would be considered taxable income in the period in which the source deductions were reduced. However, not all taxpayers who were eligible to claim the TWS applied for it during the benefit period. The CRA allowed taxpayers to apply for this subsidy by reducing any payroll remittances in 2020. In addition, the CRA is allowing taxpayers to apply for a refund of the subsidy when they file Form PD27.
The ability to claim the benefit so long after the benefit period raises the question of when the TWS is taxable to the employer. When one reads the Act, it appears that the TWS is deemed to arise for all eligible entities with eligible employees without application – if you meet the conditions, you are considered to have a deemed remittance created. However, this creates a practical problem, particularly since by regulation entities can elect to reduce their TWS entitlement to nil to allow for a larger CEWS claim.
The CRA TWS site states that taxpayers should report the total subsidy amount as income on their tax return in the same year that remittances were reduced. Therefore, the CRA appears to be taking the position that the TWS will be taxed on a received basis, rather than an accrual basis.
Further information about the TWS program can be found in our Tax Alert: COVID-19–Wage Subsidy Programs — refer to the section on the 10% wage subsidy.
Canada Emergency Business Account (CEBA) Loan
The Canadian Emergency Business Account (CEBA) was introduced on March 27, 2020, as part of the federal COVID-19 support programs. The CEBA is a loan program facilitated by Canadian lending institutions under which an interest-free loan of up to $60,000 is made to a qualifying small business or not-for-profit organization. The CEBA is intended to provide support for businesses during the COVID-19 pandemic for expenses that cannot be avoided or deferred. Applications can be made to this program until March 31, 2021, at participating financial institutions.
Under the terms of the program, 25% of the first $40,000 and 50% of the next $20,000 (for a maximum amount of $20,000 per applicant) will be forgiven if the balance of the loan is repaid on or before December 31, 2022. If the loan is not repaid by this date, it can be converted to a three-year term loan with a 5% interest rate.
Under the Act, the forgivable portion of a loan such as the CEBA is taxable to the recipient when the loan is received. For example, for a business that had a December 31, 2020, tax year-end and applied for the maximum CEBA of $60,000 in 2020, $20,000 of this loan must be included in their 2020 taxable income.
The taxpayer can make an election to reduce the expenses in respect of which the loan is received instead of reporting the forgivable amount as income. To the extent those expenses extend into the next taxation year, this can provide a deferral of the portion of the loan intended to cover those future expenses to that subsequent taxation year.
If the loan is not repaid by the end of 2022 (and therefore the conditions for a portion of the loan to be forgiven are not met), a tax deduction is available at that time, to the extent that the loan was brought into taxable income, or reduced eligible expenses, in a previous taxation year.
For further information about the CEBA program, see our Tax Alert: Government increases loans available under the Canada Emergency Business Account (CEBA).
Canada Emergency Commercial Rent Assistance (CECRA) loan
This program was introduced in the spring of 2020, initially to assist small businesses in April, May, and June that suffered declines in revenue of at least 70% as compared to the same months in the prior year. This loan program was extended to September 2020 and then was replaced by the CERS program (noted above) starting September 27, 2020.
This program was an interest-free forgivable loan extended to commercial property owners who met the requirements of the program. The program covered 50% of the rent that was to be received from qualifying tenants. The property owner was expected to reduce the tenant's rent by at least 75%, which would leave the tenant to pay a maximum of 25% of the amount of the rent specified in their lease. As a result of these conditions, the landlord would forfeit a minimum of 25% of the rent that would otherwise be due from the tenant.
If the terms and conditions of the loan had been adhered to, the loan to the landlord was forgiven on December 31, 2020. Canada Mortgage and Housing Corporation (CMHC) administered this program. The forgivable loan 50% of the rent for a given month is considered taxable when the loan was received from CMHC. If the loan were not forgiven, the property owner recipient would then need to repay the loan in full. Where this situation occurs, and the forgivable portion of the loan was included in taxable income, a deduction to taxable income will be allowed when the portion of the loan that was included in income is repaid.
Further details about the CECRA program can be found in our Tax Alert: The Canada Emergency Commercial Rent Assistance (CECRA) to bring rent relief to small business tenants.
Summary
If you have filed your corporate tax return and did not include the COVID-19 benefit related to any of the COVID-19 support programs when they were required to be included in taxable income, we recommend that your tax return be amended to include the benefit in the appropriate taxation year.
If you would like further assistance in determining the income tax implications of the receipt of federal support under one of these programs, please contact your BDO advisor.
The information in this publication is current as of February 20, 2021.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.